Gazprom moved from a stabilization phase to a growth phase in its development. Talking points by Alexey Miller at the Annual General Shareholders Meeting
June 27 2003, Moscow
Gazprom annual shareholders' meeting is in progress in Moscow. Alexey Miller, Chairman of the Management Committee, Gazprom, presented his report to the company's shareholders.
He emphasized that Gazprom moved from a stabilization phase to a growth phase in its development. 2002 results and the current results for this year clearly demonstrate the company's positive development dynamics.
Alexey Miller evaluated the current market environment for Gazprom, and identified several major challenges the company had to deal with. He mentioned the European market competition tightening, among others. The diversification of most suppliers and their supply channels is demonstrated by many European governments and companies. The competition is strong “not only in the gas market for delivery contracts, but also in the financial markets for investor's attention.”
The European market business environment is changing. According to A. Miller, the necessity of long term contracts among wholesale gas suppliers and their consumers is not in question. Such contracts are the foundation of Gazprom business. At the same time, the current specific conditions and working principles are being adjusted.
The wholesale gas trade system is evolving. This market is gaining significant importance for Gazprom.
A. Miller reminded of Gazprom's responsibility for the domestic market gas supplies. The domestic market business is still unprofitable because of the low regulated gas prices for the consumers in Russia. Gazprom' Chairman of the Management Committee stated that “this is reflected in Gazprom yearly financial results and influences our competitive position”.
Speaking on the main international markets' trends, Alexey Miller said that the demand for natural gas was set to increase significantly in the nearest future.
New regional energy consumption centers are gradually developing, including the Asia Pacific countries. Natural gas may become the leading energy resource in the world energy consumption structure within the next several decades up to the next century. We can count on Gazprom to continue to be the leader in the Russian gas and oil industry, as well as in the Eurasian gas market.
The Chairman's report focused on the company's strategic targets. The main one is Gazprom's efficiency improvement and dynamic development in the shareholders' and consumers' interests. Gazprom, as a modern integrated energy corporation, is going to play an ever increasing role within the world market.
Gazprom will have to adjust to changing market conditions and utilize superior technologies in order to implement this development goal.
Gazprom strategy also includes the creation of mutually beneficial long-term alliances with leading international oil and gas companies. This will enable Gazprom to diversify its businesses and implement its own integration into the world energy markets.
Gazprom is a vertically integrated corporation, and includes the entire natural gas business cycle from exploration and production to transmission, treatment and sales. The vertical integration structure will be enhanced.
Gazprom is implementing a number of projects aimed at gas transmission business participation beyond the Russian boundaries and direct supplies to consumers. A number of decisions were taken to consolidate domestic sales. New possibilities in hydrocarbon resources utilization are closely studied. New projects are under way in petrochemical and natural gas chemical industry, and liquefied natural gas (LNG) manufacturing. Petrochemicals and LNG are slated for exports.
Resource base, markets, gas transmission routes and gas treatment technologies diversification will serve as the basis for the company's strategy.
Nadym-Pur-Tazovsk region, West Siberia, will remain the key natural gas production region, and Yamal Peninsula, offshore deposits, East Siberia and the Russian Far East gas deposits will be developed as well. Kazakhstan and Turkmenistan natural gas purchases are part of the resource base diversification process.
Alexey Miller identified new marker entry, especially in the Asia Pacific Region, as the most important task for Gazprom. A possibility of Russian produced LNG exports to the American market is under consideration.
The report elaborated on the corporate management efficiency and overall business efficiency increase measures aimed at raising the company's market capitalization. The top management structure was reorganized. Gazprom is paying dividends on a yearly basis, and the dividend policy is based on a combination of current interests and perspective long-term development goals.
Property Management Strategy was formulated by the company. In 2002 the control over Purgaz, Vostokgazprom, Severneftegazprom, and Zapsibgazprom was reinstated. Gazprom equity share dilution in Sibur was stopped. Alexey Miller reminded that a 4.83% equity share in Stroytransgaz was returned under Gazprom control.
The tasks for the nearest future include, according to A. Miller, a unified corporate policy implementation within affiliated companies; assets return and consolidation program completion; Gazprom property rights registration finalization (includes more than 40,000 properties).
Gazprom sold non-core business assets for the amount equivalent to RUR 10.2 billion (the planned amount was RUR 9 billion). Non-core business sales are conducted openly at tenders and auctions. The Chairman of the Management Committee emphasized that non-core business assets and property sales are not an end in itself. Business assets which are not bringing in profits are being sold. In this respect, the target figure for 2003 is RUR 6 billion.
Gazprom is preparing and publishing its intermediate and yearly IAS financial statements to facilitate financial transparency and information openness.
A. Miller reminded that the previous Annual Shareholders' meeting approved the Corporate Governance Code (Corporate Code of Conduct) which ensures the rights and interests of shareholders, decision making process transparency, Board of Directors members' and top management responsibilities.
In terms of the company's financials, A. Miller reported that according to the 2002 Russian accounting standards' financial statements, sales proceeds amounted to RUR 613.7 billion, which is a 4.3% increase compared to 2001.
The company approved Internal Budgeting Code. The document finalized all the internal budgeting and expenses procedures.
In 2002 Gazprom approved the Investment Projects Formulation and Implementation Regulations that coordinate these projects implementation.
A. Miller noted that Gazprom is pursuing capital sources diversification, financing costs decreases and duration terms increases. Short term debt volume is decreasing and replaced by long term financing. Gazprom basically curtailed the program of corporate promissory notes' issues since it was insufficiently transparent and “expensive”.
The management is pursuing a large-scale expense reduction program. Subsidiaries procurement and expenditure control program is currently implemented. The savings amount to RUR 9.2 billion in 2002 as a result of expenses reduction.
A. Miller mentioned a number of indicators that reflect the company's productivity increase. The cost of one thousand cubic meters of natural gas production, including gas treatment is RUR 119.2, 3.4% lower than previously estimated. Transmission cost within Russia is RUR 381.2, or 2.5% lower than the estimate.
Gazprom cost reduction program for 2003 is aimed at operational, investment and financial costs reduction by RUR 40 billion.
Alexey Miller noted in his report to the shareholders that Gazprom would actively utilize tenders in procurement, and that will result in investment programs implementation costs' reduction.
Gazprom plans to use new approaches in its project financing. This will enable the company to share investment risks with other investors and optimize the long term corporate financing program. Leasing operations utilization will facilitate additional financial resources without increasing Gazprom's debt burden.
In the nearest future a mortgage program concept will be approved.
Regarding Gazprom's domestic market operations, A. Miller reported that in 2002 domestic natural gas sales accounted for 62.3% of overall natural gas sales, namely 283.5 billion cubic meters of gas. 96.9% of current natural gas supply is paid for by the consumers, and 21.4% of bad debts were recovered. Monetary means constitute 89.7% in the overall natural gas supply payments structure.
The domestic market is still loss-making, and is going to be more attractive business-wise in the nearest future. It depends on the government regulation of natural gas prices in Russia. Gazprom top manager stated that the government's pricing policy needs to be improved, including price level determination that reflects justified expenditures recovery, and a rate of return on invested capital that facilitates production development.
Gradual natural gas market liberalization must be based on the non-regulated market segment. Commodity exchange trade in gas may serve as the basis for setting the market price indicator.
Alexey Miller supported the idea of independent gas producers' development. 28 companies used Gazprom services and facilities in 2002. These companies produced and transported 13.1% of natural gas production volumes via the Unified Gas Transmission system. Gazprom provided gas transmission and storage services (88.6 billion cubic meters) to the independent producers.
The Chairman of the Management Committee, Gazprom, identified natural gas transmission and supply outside Russia, and direct sales to end users, as the key tasks. This can be achieved through active participation in privatization of gas transmission facilities abroad, and equity share purchases in foreign companies. Gazprom has equities in Moldovagas, Latvijas gaze, Eesti Gaas, ArmRosgazprom, Kazrosgaz, EuroPolGaz. Gazprom, Ruhrgas and Gaz de France consortium purchased 49% in SPP, a Slovak gas transmission company. Gazprom's Chairman of the Management Committee underlined that SPP was going to be an important link in Russian gas supply system to Western and Central Europe.
Gazprom has equity stakes in a number of trading houses which were established in several European countries, as well as joint ventures and joint stock companies (30 enterprises). Simultaneously, Gazprom is cooperating with traditional foreign partners, including joint investment projects in natural gas production in Russia.
Regarding the foreign markets activities results (export sales), Alexey Miller noted that natural gas exports to foreign countries (excluding the Former Soviet Union (FSU) countries) amounted to 128.6 billion cubic meters in 2002 (an increase of 1.7 billion cubic meters compared to 2001), and exports to the Commonwealth of Independent States and the Baltic countries amounted to 42.3 billion cubic meters.
Exports to the Former Soviet Union countries will expand
Europe is an important market for Gazprom. The volumes of natural gas sales to Europe will be increased to 130 billion cubic meters in 2003. The current contracts provide for 175 billion cubic meters supply volumes by 2008.
According to the report, North East Asia, especially China, the Republic of Korea and Japan represent a promising market for the Russian natural gas exports.
The Asian Pacific countries represent a vast export market for Russia, and these countries may become natural gas resources development and gas pipelines construction partners. Gazprom's participation in West-East gas pipeline construction project is an example of such cooperation.
Natural gas transmission system maintenance is on the company's priority list. Compressor stations and trunk pipeline sections integrated renovation program is scheduled to be completed in 2006. New Central Asia – Center pipelines are currently at the project evaluation stage.
A. Miller emphasized the importance of gas transmission routes diversification, and the importance of new projects development.
The Black Sea Russia-Turkey natural gas pipeline commenced operation in 2003. The Blue Stream project covers Europe's south-east natural gas market segment, serving as a basis for continuing Russian gas exports expansion in this market.
Central European market oriented Yamal-Europe gas pipeline is under construction.
The North-European gas pipeline is going to be a large-scale strategic project. This pipeline will directly connect Russian and European gas transmission networks. The project includes sea gas pipeline branch construction to deliver natural gas to Finland, Sweden and other countries.
LNG and compressed natural gas (CNG) exports is a promising area for Gazprom. These projects' implementation will enable Gazprom to be more flexible in natural gas transmission routes and supply methods in its exports.
Gazprom put a lot of efforts in the past two years in defining the company's natural gas production projects investment strategy. Unique natural gas reserves development in Yamal peninsula is the most promising project. Yamal gas production volume is estimated to reach 180–190 billion cubic meters by 2020.
Barents Sea Shtokmanovskoye natural gas deposit is going to be the second largest project included in the investment strategy.
Large-scale exploration projects are under way in Eastern Russia. Irkutsk Oblast and Sakha (Yakutiya) Republic natural gas deposits constitute 70% of explored reserves in the region, Sakhalin and Krasnoyarskii Krai deposits are also important.
East Siberia and the Russian Far East natural gas production is estimated to reach 110 billion cubic meters by 2020, and the region can become the country's new gas production center.
Central Asia will be an additional gas supply source for Gazprom. Russia and Kazakhstan established KazRosGaz to join efforts in export markets. Russia and Turkmenistan signed a long-term natural gas supply agreement facilitating gas supplies to Russia.
Gazprom holds the largest natural gas reserves in the world. As of December 2002, commercial gas reserves stood at 28.8 trillion cubic meters (including 2.9 trillion cubic meters maintained by Gazprom affiliated companies and companies, in which Gazprom is a shareholder). Twenty main Gazprom gas deposits (82% of the total reserves) were certified according to international standards. “Proved” and “estimated” reserves combined amounts to 18 trillion cubic meters. Current market price of the reserves is US$ 59.5 billion.
Gazprom exploration activities were successful in 2002. The total amount spent on exploration is RUR 6.7 billion, six new fields were discovered. Discovered reserves increased by 535.7 million tons of oil equivalent. For the first time in ten years the parity of production to reserves' increase was reached.
The longstanding tradition of gas production decrease was reversed in 2002. An increase in production was achieved for the first time in five years. In 2002 gas production volume reached 521.9 billion cubic meters, an increase of 10 billion cubic meters over 2001.
In 2003, the increase in production over the estimated figures was 5.5 billion cubic meters. Natural gas production for 2003 is 540–541 billion cubic meters, and the task of “stabilization at the level of 530” will be fulfilled.
Alexey Miller stated that new frontiers must correspond to the present day abilities of the company, and to the tasks the Russian economy is facing now. The new economic growth estimates preclude an update of natural gas demand and Gazprom production target figures. Gazprom Management Committee decided to increase its production target figures from 530 billion to 580–590 billion cubic meters by the year 2020, and to 610–630 billion cubic meters of natural gas by 2030. This is a clear illustration of today's “From stabilization to growth” thesis.